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Recent Corporate Representation
Posted by: David Fishkin
May 19, 2010
Topic: Corporate and Securities Updates

SBK represented a long-standing client in the gaming and hospitality industry in connection with the client's deregistration from the Investment Company Act of 1940. A long and complex process, including significant review and negotiation with the Securities and Exchange Commission's Division of Investment Management, culminated in the SEC issuing the order that deregistered the company from the '40 Act, which resulted in the company once again becoming a traditional operating entity subject to the reporting requirements under the Securities Exchange Act of 1934. The client had originally registered under the '40 Act as a result of the composition of its assets consisting of a high percentage in investment grade securities following the divesture of a significant subsidiary in 2005. The Company had been seeking this result in order to reestablish itself as an operating company in the eyes of the business and corporate finance world.

Jack Becker and David R. Fishkin represented the client before the SEC in connection with the deregistration.

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Recent Real Estate Litigation
Posted by: Bruce Feffer
March 12, 2010
Topic: Real Estate Updates

A three year legal battle with a defiant commercial tenant came to an abrupt but successful end as SBK assisted a Manhattan building owner in getting the tenant out. The tenant, in addition to repeatedly falling behind in rent payments, had constructed illegal interior rooms in the building basement and roll-down gates to prevent the owner from gaining access. In early 2010, a warrant of eviction was issued by the Landlord-Tenant Court, and the tenant was also held in contempt by the Supreme Court for refusing to pay a penalty imposed by the Court after the illegal construction was not dismantled.

Perhaps sensing the walls closing in on him, the tenant filed a bankruptcy petition in an effort to freeze and delay his eviction. The strategy back-fired when, shortly thereafter, the Bankruptcy Court Trustee swooped in and took possession of the premises and everything in it. Since the commercial lease and inventory was an asset of the estate in bankruptcy, the Trustee had the power to seize it immediately.

The owner will be working with the Bankruptcy Trustee to identify a new and appropriate tenant.

Bruce Feffer represented the building owner in both the Supreme Court and Landlord-Tenant proceedings.

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Changes to New York's Power of Attorney Law
Posted by: Ken Citron
March 09, 2010
Topic: Real Estate Updates

Attached is a copy of an article written by SBK attorneys Marc J. Luxemburg and Mark Borten which was published in the October 9, 2009 edition of the New York Law Journal pertaining to changes to New York's power of attorney law.

Attachments:
NYLJ10-9-09.pdf

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Real Estate News and Developments
Posted by: Marc J. Luxemburg
March 08, 2010
Topic: Real Estate Updates

RECENT APPEARANCES:

Marc Luxemburg was a featured speaker at the New York County Lawyers Construction Law for Condo and Co-Op Lawyers seminar on Construction Contracts, Liens, Permits and Inspections.

RECENT CLOSINGS:

Mark Borten and Jillian Goorevitch represented two 72-unit co-op apartment buildings, located in Bronx County, New York, in the refinancing of two $3 million mortgages with NCB.

Mark Borten represented the seller of ten brownstone buildings located in various parts of Manhattan for an aggregate sale price of $29 million.

Jillian Goorevitch represented a landlord in the negotiation of a restaurant lease in Union, New Jersey.

RECENT REAL ESTATE LITIGATION

Client Condominium was sued by a Unit Owner for personal injury and property damage due to exposure to secondhand smoke from an adjacent apartment. The client was denied coverage by its liability insurer on the grounds of late notification of the claim. The insurer took the position that notification was required after receiving the shareholder's first complaint about smoking. The liability policy required notification by the insured "as soon as practicable" of an "occurrence or an offense which may result in a claim." "Occurrence" is defined in the policy as "continuous or repeated exposure to substantially the same general harmful conditions." We demonstrated to the insurer that there was no "occurrence" requiring notification until there had been repeated "exposure to harmful conditions." Thus the insured's notification to the insurer promptly after being served with the complaint was timely. The insurer withdrew its prior declination of coverage and provided the client with a defense in the lawsuit. Marc Luxemburg and Michael Cuddy represented the Condominium.

SBK was retained to take over the prosecution of an action on behalf of a builder/developer for malpractice and breach of contract against an architectural professional corporation and its principal for failing to prepare drawings/plans which were approved by the Department of Buildings ("DOB"), after multiple attempts and being retained on the project for over nine months. Damages of over $1 million were sought for the additional professional fees to obtain approved plans, increased costs of materials due to the delay in commencing construction, and loss of rental income. The suit was settled by the liability insurer's tender of the policy limits after completion of disclosure and mediation by the parties. Michael Cuddy represented the builder/developer.

NEWS AND CASES OF INTEREST:

•· How does the Board ensure that it will be successful in evicting a tenant-shareholder?

For a co-op board to ensure that it is complying with the Pullman due process requirements, it must provide notice and an opportunity for the tenant-shareholder to be heard prior to terminating the proprietary lease for objectionable conduct. It is essential that the notice be timely. A notice sent to a defaulting shareholder several years before the meeting where the eviction is being discussed is not sufficient. It is also important to send notices to the proper party designated under the proprietary lease. Family members or other adults responsible for the tenant-shareholder may not be recognized as agents of the tenant-shareholder for notice purposes. To avoid the improper service of notices, the board should consult with its legal counsel or carefully review the notice provisions in the proprietary lease to make sure that the notices are being sent out in compliance with notice requirements set forth in the proprietary lease.

In F.T. Apartments Corp. v. Barbara L., 2009 WL 1886891 (Civ. Ct. NY Co, 6/17/2009), the court expanded upon the Pullman decision, which requires that co-op boards give tenant-shareholders notice and an opportunity to be heard before their proprietary lease is terminated based upon objectionableconduct. The court held that the tenant-shareholder, who was an incapacitated person represented by a guardian, was not given proper notice and an opportunity to be heard. The co-op board had letters sent to the shareholder's relatives which the court held did not comply with the notice provisions of the proprietary lease, and therefore did not constitute notice to the shareholder. Furthermore, the termination occurred over 3 years after the only default notice sent to the shareholder.

•· How does the Board ensure that its determinations will be upheld under the Business Judgment Rule?

There are several things that the board can do to ensure that its determinations will be upheld and validated when a court examines its decisions applying the Business Judgment Rule.

First, when investigating claims against shareholders/unit owners, it is critical that the board retain an expert to conduct an independent investigation and evaluation. Second, board members need to carefully examine and balance the competing interests of different shareholders/unit owners when arriving at decisions. Finally, the board should take minutes at every board meeting and properly retain the records.

In Branscombe Investments, Ltd. v. Board of Managers of the Olympic Tower Condominium, a unit owner claimed that the board violated the by-laws when the board failed to cause the removal of security cameras installed to observe the common hallway by another unit owner, and that the unit owner's privacy was being unlawfully invaded. (Decision of 2/1/2008, Sup. Ct. NY Co. Index No. 603543/05 (Ling-Cohan, J.). Applying the Business Judgment Rule, the court held that the board had acted properly and in good faith. In reaching that holding, the court's analysis highlighted many principles of which every board should be aware.

First, the court was moved by the fact that the board had retained an expert to conduct an independent investigation, which supported the board's ultimate determination. Second, the court held that the board was entitled to recover its attorneys' fees from the unit owner. This was based upon language in the by-laws that explicitly stated if a unit owner sues the board in violation of condominium rules and receives an adverse determination or the complaint is dismissed, the board is entitled to recover its attorneys' fees. Finally, the court discussed the importance of retaining records of meeting minutes.

•· How does the Board protect against possible liability of the managing agent to an injured employee?

To protect managing agents, it is essential that management contracts be carefully drafted to include language explicitly stating that the managing agent has control over the building's employees.

In Akins v. D.K. Interiors, Ltd. [230 Tenants Corp.], 885 NYS2d 289 (1^st Dept. 9/24/2009), an injured doorman had been successful in a workers' compensation claim and subsequently sued the managing agent of the co-op, in which the injury occurred. The building staff member was supervised by the superintendent, who took his instructions from the managing agent's property manager. The management contract gave the managing agent, Akam, control of the employees and Akam controlled the daily operation of the building. Therefore, the court held that Akam was the plaintiff's "special employer". By designating the managing agent as a "special employer", the managing agent was immune from being sued by the injured worker for personal injury claims.

•· How can a co-op board avoid a long-term lease of the commercial space to a sponsor?

If a co-op board can show that a long-term lease runs afoul of the Rule Against Perpetuities, a court will invalidate the lease. The complex Rule Against Perpetuities states that an interest in real property is not valid unless it vests within 21 years of a life in being at the creation of the interest. Although very few can actually understand what the rule means, the important thing to understand is simple, the consequences. Long-term leases, under certain circumstances, may violate the Rule Against Perpetuities, and therefore the board can seek to

invalidate them. One of these situations is a lease with options to renew, which are exercisable after the lease term has technically expired. There are many other ways that long-term leases can violate the Rule Against Perpetuities.

In a recent case, Bleecker Street Tenants Corp. v. Bleeker Jones LLC, 882 NYS2d 42 (1^st Dept. 6/23/2009) the sponsor had entered into a commercial lease of the first-floor space of a co-op for a 14 year term with nine 10-year options to renew. The options clause contained a savings provision providing that if the landlord failed to give the tenant 60 days' notice and the lease term expired, then the tenant would remain in possession as a month-to-month tenant until after the landlord gave the tenant the 60 days' notice. The court held that the options clauses violated the Rule Against Perpetuities because the savings provision allowed the renewal option to be exercised after the Lease had expired, and the Lease was invalidated.

•· Is the Board really protected by a contractor's insurance?

Co-ops may not be adequately protected under a contractor's or a subcontractor's insurance policy, even if the co-op is named as an additional insured. Although a contractor may be contractually obligated to obtain an insurance policy, there are no legal safeguards to ensure that the policy provides adequate and meaningful coverage. For example, contractors are not prohibited from obtaining policies with exclusions so broad that the exclusions essentially render the policy meaningless. To avoid the pitfalls of illusory insurance coverage, it is essential that the co-op board, under the guidance of its attorneys, carefully review any insurance policy under which it is named as an additional insured.

In 720-730 Fort Washington Avenue Owners Corp. v. Utica First Ins. Co., 2009 WL 3645656 (Sup. Ct. Bx. Co. 11/4/2009), a subcontractor hired to perform roofing work was contractually required to provide commercial general liability coverage. The contract also required that the policy name the owner of the co-op and the contractor as additional insureds. The subcontractor did obtain the required insurance policy; however, the policy contained exclusions for: (1) an injury to any employee of the contractor; (2) any obligation to indemnify any other party; and (3) any work arising out of roofing operations. An employee of the subcontractor was injured and brought a personal injury suit against the co-op. In this companion suit, the co-op sued the insurance company claiming that the insurer had a duty to both indemnify and defend the co-op. The argument advanced by the co-op was not that the exclusions were not applicable, but rather that they should be held to be against public policy and therefore void. The court held that the co-op had an opportunity to review the insurance policy and that had they done the proper due diligence, they would have noticed the exclusions.

•· What is a Board's remedy when a shareholder does not allow access to the terrace?

If a unit owner is denying access to a terrace, when they are required to grant access, the board can bring a suit against the unit owner. The court will compel the unit owner to allow access. In addition, even if not expressly stated in the by-laws, courts have held that the board is entitled to reimbursement of attorneys' fees and disbursements incurred in obtaining the order.

In Residential Board of Managers of the Vanderbilt Condominium v. Goldberg, NYLJ 9/8/2009, p. 18, c. 1 (Sup. Ct. NY Co.), a unit owner was ordered to reimburse the condo for legal fees expended in connection with an action the board of managers took against the unit owner to enforce its right to access the terrace appurtenant to the unit to perform repair work. Neither the by-laws nor the declaration explicitly authorized the collection of attorneys' fees in this situation. The court ultimately found that the legal fees were an extra expense incurred by the building in completing the repairs, and constituted a cost and expense "incurred in connection with the making of the repair," for which the by-laws provided reimbursement.

Despite the court awarding reimbursement of attorneys' fees to the board, it is clear that the board could have avoided this litigation by having clear language in the by-laws stating that the board is entitled to reimbursement of attorneys' fees in the enforcement of the by-laws.

•· Does the Board have authority to enter into a commercial lease?

In a recent case, the board had entered into a lease with a telecommunications company providing for the installation of a cell phone tower on the roof of the building. The condo by-laws and other governing documents had created restrictive covenants limiting the units to residential use and provided that "the common elements shall be used only for the furnishing of services and facilities for which they are reasonably intended and which are incidental to the use and occupancy of the units." The court held that the cell phone tower lease was commercial in nature and therefore the board violated the restrictions set forth in the by-laws and acted outside the scope of its authority. (Kaung v. Board of Managers of the Biltmore Towers Condominium, 873 NYS2d 421 (Sup. Ct West. Co. 12/10/2008). While the Business Judgment Rule gives the board great latitude when making decisions, this case highlights the need to consider whether any board action is prohibited by implied restrictions in the governing documents.

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Real Estate Litigation News
Posted by: Michael Cuddy
March 08, 2010
Topic: Real Estate Updates

Marc Luxemburg and Michael Cuddy recently successfully represented a condominium suing for insurance coverage in a lawsuit by and owner. The client condominium was sued by an owner for personal injury and property damage due to exposure to second-hand cigarette and cigar smoke from an adjacent apartment. The condominium's insurer denied coverage on the grounds of late notification of the claim, asserting that notice was required upon the condominium's receipt the owner's first complaint of smoking. SBK investigated the events leading up to the filing of the suit and demonstrated to the insurer that there had been no "occurrence" requiring notification since there had not been repeated "exposure to harmful conditions" as those terms were defined by the policy. Thus, the insured's notification to the insurer promptly after being served with the complaint was timely. The insurer withdrew its prior declination of coverage and provided the client with a defense in the lawsuit.

Michael Cuddy also successfully represented a builder/developer in an action against an architectural firm and it principal for malpractice and breach of contract due to their failure to prepare drawings/plans which were approved by the Department of Building ("DOB"), after being retained on the project for over nine (9) months and despite multiple attempts by the builder/developer to obtain the required drawings/plans. The suit was settled for the full amount of the architect's liability policy limit after completion of disclosure and mediation by the parties.

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Estate Taxation Bulletin
Posted by: Paul Gottlieb
March 08, 2010
Topic: Estate Planning Updates

Many of our clients are aware of the peculiar federal estate tax rules that have been in place since 2001, when the estate tax exemption was increased incrementally from $1,000,000 in 2001 to $3,500,000 in 2009 and the marginal rate was gradually reduced to 45% in 2009. The federal gift tax lifetime exemption of $1 million remains the same for now.

In 2010, since Congress (specifically the Senate) did not act prior to 1/1/2010, the federal estate and generation skipping taxes have been repealed for one year only, and will be reinstated in 2011 with a $1,000,000 exemption and a 55% marginal rate.

Estate tax practitioners assumed that Congress would solve the problem before January 2010. Unfortunately, Congress did not act; many people have characterized the lack of action as "Congressional malpractice." Therefore, effective 1/1/2010, there is no federal estate or generation skipping transfer tax for one year only.

For many people, this will not be a problem. However, the lack of the estate tax eliminates the concept known as "stepped-up basis," which is one of the few good things that results from death. An asset inherited from a decedent receives the current (date of death) value, thus eliminating capital gains for income tax purposes. However, this year, the automatic change in basis does not and will not occur. Instead, the deceased owner's income tax basis in his or her assets will "carry over" to the person who inherits the asset. The statute does allow for a $1.3 million exemption for non-spousal gifts and a $3 million exemption for spousal gifts when calculating the capital gain.

The elimination of stepped-up basis can be critical for many of our married clients whose assets total or exceed $7,000,000 ($3,500,000 per person). Under the old system, there would be no federal estate tax and the basis of their capital assets would be stepped-up to the date of death value, thereby eliminating any capital gains taxes. Now, factual research must be done in order to ascertain the basis of each asset. Good luck on finding that advice slip issued in 1973 by the brokerage firm, which may not still be in business.

Many existing estate plans contain language which requires setting aside the exemption amount in a trust for the benefit of the surviving spouse, which is intended to save estate taxes on the death of the second spouse. Unfortunately, now that there is no Federal estate tax, this plan may no longer work. It is imperative that all estate plans be reviewed.

Another potential problem is that many people believe that Congress will attempt to reinstate the federal estate tax retroactive to January 1, 2010. Since federal estate tax returns are not due until nine months after death, there is ample time for Congress to reinstate The federal estate tax before a tax return would be due. Although taxes have been retroactively reinstated in the past, and judicially upheld, this particular reinstatement, due to the political climate in Washington, will most likely be challenged and the uncertainly will most likely continue for quite a while.

In summary, the inaction of Congress and the temporary repeal of the federal estate and generation skipping transfer taxes create confusion. All estate plans should be reviewed as soon as possible and the situation should be monitored as the drama, with possible retroactive reinstatement, unfolds.

Please be aware that New York State has not rescinded the New York State Estate tax on estates over $1 million.

We strongly advise you to contact us to review your estate planning documents and to determine how the current laws affect you and your estate.

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